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Audit of inventory and Warehousing cycle

IAS 2 standard
Documentation
Goods received notes On transfer from the receiving bay to the warehouse, the warehouse
clerk will sign the goods received note which was issued when the supplier delivered the goods.
Material requisition, material issue note Requests the warehouse to release material or
components to the production section and issue note records the issued materials to the
production
Costing schedule Identify and quantify all cost which it is anticipated will be incurred in the
manufacturing process
Manufacturing or production schedules Notifies the production\manufacturing department as
to what is to be produced
Job card Tracks stages of production for a specific job. As costs are accumulated e.g. raw
materials used, labor hours expended, they are recorded on the job card.
Production report Used to record the result of production, output, and wastage loss.
Transfer to finished goods note Records the transfer of manufactured goods from
manufacturing department into finished goods stores
Picking slip Used to select goods ordered from the stores
Inventory sheet Used during the inventory count. Contains a description of inventory, its
location in stores, and column into which the counted inventory can be entered
Inventory tag A numerically sequenced cardboard tag, which is attached to different types of
inventory before an inventory count.
Inventory Adjustment form Is a sequenced document which is used to record adjustments
which must be made to correct the perpetual inventory records when actual inventory and
theoretical inventory do not agree.
Controls relating to the warehouse: Movement of goods and components and finished goods
Controls
Risks
No movement of inventory without
Goods received from the supplier are not
authorizing document
transferred timeously or at all
No movement of inventory should take
Inventory stolen or lost
Inventory deteriorates in value due to
place without being recorded
Whenever there is movement between
inadequate controls or its nature
No record is made for removed inventory
sections, both the deliver and the receiver
Inventory shortages are concealed
should acknowledge the transfer e.g.
Too much inventory produced
signing after having checked the quantity
The goods or components issued are
and quality of the items being transferred
incorrect resulting in lost sale or
against the source document
Documents should be sequentially and
production delays
numerically filed
Documents must me sequenced checked
and missing documents investigated
Physical controls

Entry and exit minimum entry


and exit point
Controlled exit and entry Swipe
cards, keycards, gate controls,
security guards, X ray
Restricted entry
Secure buildings minimum
windows and solid structure
Surveillance cameras over
production, receiving and dispatch
Reconciliations
Physical inventory is compared to
theoretical inventory per the
perpetual inventory
Actual production is compares to
manufacturing and production
schedules
Actual production is compared to
budgets
All material Variances should be
investigated

Remember for the audit of inventory


Quantity Stock counts and records
Unit cost Supplier invoices, price list, production records
Calculations 1x2
Valuation Net realizable value IAS 2
Standard - Rights, cut off, presentation, classification and presentation
Audit plan
Nature
The above reasons will lead to substantive testing especially test of details
Time
We will have to perform our substantive tests of detail for inventory as close to year end.
Extent
Sample size
Materiality
Analytical procedures
Compare gross margin percentage with that of previous years
Compare inventory turnover with that of previous years
Compare unit cost with those of previous years
Compare extended inventory value with that of previous years
Compare current year manufacturing with those of last year

Substantive procedures
Initial Procedures

Test the castings and calculations in the general ledger account


Inspect the closing balance of last year is the opening balance of the current year
Inspect that the closing balance agrees to the amount in the trial balance and
general ledger
Inspect the inventory account for an unusual amounts
Obtain the managements representation letter. Link to the scenario
Perform analytical procedures and obtain reasons for fluctuations
Balance related audit
Post inventory count procedures
Assertion right (the company holds or controls the rights to inventory)
Enquire from management as to whether there is any inventory held on consignment for
other parties
Enquire from management of any inventory billed but not delivered to customers
Obtain a listing of imported inventory in transit at financial year end and inspect relevant
orders/contract as to whether the risk and rewards have passed to the client
Establish whether inventory has been pledged as security
o Discussion with management
o Inspection of bank confirmation
o Review directors minutes of meetings
o Review loan contracts
o Viewing correspondents contracts with suppliers and credit suppliers
o Prior working papers
When performing pricing procedures inspect that they are made out to client
Assertion Valuation and classification(inventory is in the financial statements at
appropriate amount)
Pricing inventory purchased locally
o Recalculate the value of inventory by multiplying price with quantity using
CAATs and follow up on any discrepancies
o Discuss with management, the process of allocating delivery costs to the value of
inventory
o Perform an independent recalculation of cost for a sample of inventory items and
compare to managements calculation to consider whether their cost is reasonable
o Select a sample of inventory items:
Trace to relevant suppliers invoices to establish whether the correct
purchase prices have been used in obtaining the cost unit
Trace to relevant invoice from transporters, establish that relevant
carriage costs been included in unit cost calculation
Inspect that allocation of the costs to the individual items purchased is
reasonable and accurately performed
Re-perform the weighted average calculation and compare results to the
weighted average price used by management consider whether their cost
is reasonable

Select a sample of inventory items, obtain all supporting documents such as


original invoice and delivery costs and recalculate the unit cost
o Discuss with client, the need for the write down adjustment to be processed in the
current year, and include the adjustment on the schedule of unadjusted
misstatements
Pricing imported inventory purchases
o Recalculate the value of inventory by multiplying price with quantity using
CAATs and follow up on any discrepancies
o Discuss with management, the process of allocating delivery costs to the value of
inventory
o Perform an independent recalculation of cost for a sample of inventory items and
compare to managements calculation to consider whether their cost is reasonable
o Inspect the clients translation calculation of foreign imports and compare the
rate used to an independent source to ensure it is reasonable
o Re-perform the translation calculation to confirm it has been done accurately
o Select a sample of imported inventory items, obtain invoices, shipping contracts
and costing schedule
Trace to relevant suppliers invoices to establish whether the correct
purchase prices have been used in obtaining the cost unit
Trace to relevant invoice from transporters, establish that relevant
carriage costs been included in unit cost calculation
Inspect that appropriate import and custom duties and shipping charges
where included in the unit cost calculation
Inspect that allocation of the costs to the individual items purchased is
reasonable and accurately performed
o Select a sample of inventory items, obtain all supporting documents such as
original invoice, customs and excise duty and delivery costs and recalculate the
unit cost
o Discuss with client, the need for the write down adjustment to be processed in the
current year, and include the adjustment on the schedule of unadjusted
misstatements
Pricing manufactured goods
o Enquire from appropriate personnel and inspect documentation used in the
costing exercise to gain understanding of the costing method used
o Determine whether it is consistent with prior years and remains appropriate for
the business
o Where standard costing is used
Determine the appropriateness of the standard costing setting process by
discussion with management and inspection of records such as budgets
Evaluate the treatment of variances at year-end to confirm the value of
inventory has not been appropriately increased
o By inspection of the costing schedule and supporting documentation
Agree description of materials used and prices used thereof
Agree labour costs to payroll costs
Confirm that the allocation of overheads includes only fixed and
production overheads
o

Is based on normal capacity


Is on systematic basis which is reasonable
o Inspect that costs that which do not qualify as conversion costs have not been
included
o Inspect that the under and over recoveries of production overheads are correctly
treated in terms of IAS 2
o Recalculate all casts and calculations
Net realizable value
o Determine selling price with reference to price lists and recent sales invoices
o Determine sales expenses through enquiry from management
o For work in progress, determine cost to complete and sales expenses and work
back to net realizable value
o Inspect minutes of meetings to confirm that products are still be able to be sold
above their cost price and do not require any write down
o Recalculate net realizable value and compare it with cost price
For inventory allowances,:
o Discuss with management
The process used to determine their obsolescence allowance and evaluate
the process for reasonableness and consistency with prior years
Any specific events which may have occurred during the year which may
have an impact on the write down
Any procedures in place for the approval of final allowance
Any specific inventory items which may already be obsolete and how
this has been recognized in calculating the allowance for obsolescence
o Re-perform the aging of inventory by tracing back to source documents
o Compare allowances raised in the previous years to actual write-off in
subsequent year to determine accuracy
o Assess indicators of obsolescence such as
o Perform analytical procedure to obtain a general overview as to the
reasonableness of the by comparison of current year figures and previous year
figures
o Review working papers form year-end test counts to ensure that inventory items
identified as damaged/obsolete/slow moving have been included in the allowance
o Re-perform any calculations of inventory obsolescence allowance and discuss the
reasonableness of the allowance in terms of evidence gathered
Other points
o Request management to recalculate, adjust or correct error or misstatement.
o Include the adjustment, difference or correction on the schedule of unadjusted
misstatements
o Consider the use of an independent expert for this purpose
Assertion completeness
Trace selected items from the physical inventory to managements records to inspect that
they are recorded
Perform test counts at all inventory locations
Inspect the bank statement for any payments of inventory if they have been recorded

Inspect the supplier contact for any inventory purchase on monthly basis agreement if has
been recorded
Inspect minutes of meeting of directors for any planned inventory purchase
Inspect inventory budgets for budgeted inventory budgets
Perform analytics on cost of goods sold to determine if significant fluctuations exist that
would necessitate an audit investigation
Obtain a listing of imported inventory in transit at financial year end and inspect relevant
orders/contract as to whether the ownership has passed to the client have been recorded
Enquire from management if there is inventory held at third party locations and Inspect
that it is included in the year-end inventory
If any, inspect that any inventory held at third party locations are included in the year-end
inventory
Assertion Existence
Trace a selected items from managements count records to the physical inventory for
physical existence
If any, inspect that inventory billed and not delivered is not included in the year-end
inventory figure
If any, inspect that inventory held for third parties are not included in the year-end
inventory figure
Assertion Presentation and disclosure
Inspect the financial statements disclosures and consider:
o They are disclosed in accordance with IFRS
o They are consistent with evidence gathered during the audit
o The wording of disclosure is clear and understandable
o Any classification of information is disclosed is appropriate

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